Making sense of BNPL business models

By Market Index
Thu 23 Dec 21, 12:46pm (AEDT)

Key Points

  • How future-proof are the business models of BNPL stocks?
  • New reforms seek to hold BNPLs to the same standards as banks
  • Market excitement over the BNPL sector has waned

At face value, most buy now pay later (BNPL) operators offer consumers the same basic proposition: Interest free, instalment-based payments for a growing plethora goods and services.

While this may be a no-brainer, where these BNPLs diverge from one another is in their target markets, pricing, margins, profitability, and future sustainability.

While all stocks in the sector have arguably piggy-backed off the success of industry leviathan, Afterpay (ASX: AFT) earlier this year, the sector now knows what it feels like to be given the cold shoulder.

Future proof

Given the notable mood change, the market is increasingly kicking the tyres of these BNPL operators’ services to find out which ones will be around over the longer haul.

Having lots of customers is one thing, but will that future-proof these businesses, and guarantee decent returns to shareholders?

Market Index has raised the skirt on the business models of key providers to try and find out:

These include BNPL goliath and ASX20 stock Afterpay, Zip Co (ASX: ZIP), Openpay (ASX: OPY), LayBuy Group Holdings (ASX: LBY), Splitit (ASX: SPT), Sezzle (ASX: SZL), and Zebit Inc (ASX: ZBT).

Two of the BNPL’s earliest market entrants are credit card payment disruptors Afterpay and Zip Co, both of which captured the market’s imagination by letting consumers access small amount of credit instantly while sidestepping traditional payment types.

Consumers are able to tap these two BNPL services and successfully avoid credit cards, traditional financial institutions – plus myriads of paperwork.

What’s the difference?

That’s all well and good, but rival BNPL operators also claim to offer this, so what’s the difference?

To find out, you have to do a deep dive beyond the reason why BNPLs came to market and check out how their unique businesses compare against some key financial measures.

Before we look at some key metrics, let’s look at some quick insights.  BNPLs tend to have sizable refund facilities which they draw on to operate.

But how they use these facilities goes a long way to explaining their future financial performance.

The BNPL landscape is rapidly changing, and new players are constantly entering the market. But typically, BNPLs have paid the merchant first, and then have the customers repay them over time.


Generally speaking, the higher the repayment (amount) and frequency, the better a BNPL’s all-important receivables turnover should be.

In layman’s terms, receivables turnover ratio is a yardstick of how efficiently a firm uses its assets.

When looking at receivables turnover, it’s important to note that Afterpay, Sezzle Inc and Laybuy have ‘traditionally had shortest repayment terms and the highest repayment frequency.

While the BNPL market is rapidly changing, four interest-free payments over six weeks is typically regarded as a short repayment period.

As a result, they tend to have the highest receivable turnover, and hence business models that are more capital efficient.

Net transaction margin

Another key metric to track when comparing BNPLs is net transaction margin (NTM), which reflects a company’s gross profit (as a percentage of gross merchant volume) after factoring in losses and funding costs.

The higher the NTM the better. The beauty of the NTM is it reveals to investors the business model’s operating profitability and it the direction (trend line) in which it’s heading.

Cost income ratio

Then there’s the cost income ratio which is the ratio of total operating costs (excluding bad and doubtful debt charges) to total income (the sum of net interest and noninterest income).

As a rule of thumb, Zip Co tends to have the highest NTM, but this tends to be on low turnover relative to its peers.

By comparison, LayBuy and Sezzle, NTMs are at the lower end, which tends to reflect lower gross profit per transaction.

What’s in store in 2022?

With new reforms seeking to hold BNPLs to the same standards as banks, 2022 could be another tough year for the sector.

Given that around 20% of all online retail transactions by value are now conducted via BNPL companies, the sector can’t expect to go on flying under the radar.

Afterpay acquirer, Square is due to list on ASX boards during the first week in January 2022.

Ten days later pay-on-demand start-up, Before Pay (ASX: B4P) is hoping to woo investors when it floats on the ASX with $35m IPO.

Given the myriad issues now confronting the sector, the jury’s out of whether these two new listings will enjoy the same love dished out to previous market entrants.


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Market Index

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